The ripple effect of the leaky building saga: Impact on New Zealand common law and directors’ liability, and growth area for ADR?

As guests of the Arbitrators and Mediators Institute of New Zealand (AMINZ), Construction Partner Janine Stewart and Senior Associate Kate Muldrew led a webinar on the impact of the leaky building crisis, facilitated by Mark Kelly, AMINZ President.

During the session, Janine and Kate closely examined the impact that defective building cases have had on shaping New Zealand’s common law, the scope for directors to be held personally liable, and how alternative dispute resolution can be utilised (particularly in latent defect cases moving forward).

The ten key takeouts from the session were:

Thousands of leaky building claims have created an intense forum for the testing and expansion of common law principles

New Zealand’s leaky building saga has translated to an intergenerational, multi-billion-dollar area of dispute and a significant forum for legal argument and judicial analysis. The sheer scale of the crisis has seen an unprecedented number of claims that have at times tested the capacity of the Courts, leading to genuine concerns around access to justice. Media commentary estimates the number of disputes between 2008 and 2018 at a staggering figure of 8,800, with territorial authorities paying over $1billion to settle claims during that period.

The complexity of defective building claims has shaped New Zealand’s common law

The array of parties involved in construction projects translate to an inherent complexity in defective building claims. Parties range from those involved in the initial phase of the construction (including owners, developers, architects, engineers, building contractors, territorial authorities, and suppliers) to the granular level of subcontractors, spanning the full spectrum of trades. Although the vast majority of cases are settled out of the Courts, those that are resolved within the Court system have drawn on previous case law and led to further key developments including personal liability of directors with significant control over construction projects; an extension of duties owed by territorial authorities; tort and contractual developments; the clarification of the parameters of joint and several liability and contributory negligence; and an examination of when time starts and stops running on claims. These points have been tested, settled, and then tested again by the Courts, leading to expansive development of the common law.

Parties exerting direct control over project development and/or involved in work onsite (including directors) are exposed to personal liability regardless of “ the corporate veil”

While the Mainzeal case thrust directors’ liability firmly into the spotlight, the issue of whether a director can be held personally liable has been a pressing question for some time. It is clear that the metaphorical corporate veil can no longer shield directors, with the Courts increasingly willing to find directors personally liable in cases where they have assumed the requisite degree of control and personal responsibility. Directors should remain vigilant, particularly in the case of directors of construction companies who are frequently on site, on the tools, and/or assuming responsibility for key decisions on a project. These directors, whose roles overlap by carrying out a governance role and the exercise of personal control of a construction site, therefore need to be mindful of the personal liability that involvement attracts. It’s important to note that in assessing whether a duty of care exists, the Courts are not applying any ‘new’ law, but applying long-established negligence principles. The classic facets of establishing negligence (duty, breach, causation and damage) remain the framework against which claims are decided, irrespective of the shaping of common law in the specific context of defective building and latent defect cases.

The liability of parent companies is a developing area

The recent James Hardie Industries Plc v White case is the first (and currently, the only) New Zealand case to examine whether a parent company can owe an individual duty of care to end users. This recent decision confirms that this is a developing area of law, with the Court of Appeal finding it arguable that the global parent company in the James Hardie group owed duties of care in respect of the operations of its New Zealand subsidiary. The test for liability remains by imposing the ordinary negligence principles, and the Court identified broad, non-exhaustive categories for potential liability. This decision, plus a line of English cases, demonstrate the boundaries of liability of parent companies and companies within a multinational group are yet to be clearly defined, and this area is open to further development.

Territorial authority exposure is settled – but cases must still be proven

New Zealand is one of two jurisdictions that have territorial authority liability (the other being Canada). This liability is long-established, arising from the Privy Council decision of Hamlin, which confirmed the Council owed a duty of care to residential owners of standalone buildings to take reasonable care in carrying out its statutory functions. This duty has been developed through the years, including extending the Hamlin duty to commercial buildings. The current position is well settled: territorial authorities owe a duty of care to building owners, regardless of whether they are original, subsequent or commissioning owners of residential or commercial premises. However, we are increasingly seeing more rigor applied to the technical aspects of claims, meaning that although the exposure may be settled, the case against the Council (and indeed all defendants) still needs to be proved to the “more likely than not” civil standard of proof.

Material suppliers do owe a duty of care – the extent to which remains to be developed

In some respects, material suppliers are the final piece of the jigsaw puzzle: despite being, after all, the starting point for the construction of a building. The recent Cridge decision confirmed that material suppliers can owe a duty of care to residential owners by applying the traditional two stage test for establishing duties of care (based on proximity and policy factors). Furthermore, the Supreme Court held that the manufacture of building products and materials is not ‘building work’ and therefore not subject to the 10 year longstop under the Building Act. With this door having been opened, we expect to see more claims of this nature in the future.

Expert witnesses have an important role to play

With the legal position often largely being settled in defective building cases, expert evidence is becoming increasingly important – and a real focus in on the quality of the expert evidence provided. In addition to expert witnesses complying with the code of conduct under the High Court Rules, experts must ensure that they are providing evidence that is within their area of expertise, and robust enough to withstand attack. We expect this to continue to be an area of focus, translating to a continuing need to obtain resilient, experienced experts to assist the Court or arbitrator in providing their expert evidence.

There is a real role for alternative dispute resolution in latent defect cases

The Government and the Courts have attempted to mitigate the heavy workload of classic leaky building cases for the Courts. While those leaky building cases are on the decline, latent defect cases are still prominent, spanning structural and passive fire issues, defective remedial work, and product liability cases. We see these cases as being ripe for resolution via alternative dispute resolution mechanisms. The primary role that alternative dispute resolution can play in latent building cases is offering flexibility, and efficiency.

Arbitration has significant advantages (and some downsides)

The benefits of arbitration are significant. The parties have the ability to select an arbitrator, and in New Zealand, we are fortunate to have a large pool of highly-experienced arbitrators who are well-equipped to dispense with defective building cases. There is also an inherent advantage in being able to set the procedural playing field, meaning legal counsel can tailor the procedural steps to suit the nature of the dispute (and minimise procedural game-playing). Furthermore, the adaptability and use of technology in ADR forums means they are agile enough to adapt to the current climate of dispute resolution in the times of a pandemic. On the downside, arbitration does not develop legal precedent, and can be challenging in a multi-party dispute. It can also be perceived to me more expensive (however, in our experience it is often less so, due to a compressed timetable and maintaining momentum).

Mediation and Arbitration: not “either/or”

Traditionally, weathertightness disputes have been overwhelmingly settled out of Court, with 97% of cases between 2013 to 2018 settled this way. While mediation is focused on eliciting a settlement, and arbitration is more akin to a Court process, both can coexist in a harmonious fashion. We see that both mediation and arbitration have important complementary roles to play. Furthermore, a distinct advantage of mediation in an arbitration context is having the agility to shepherd parties to mediation more efficiently.

Please contact us if you would like further information on these key themes.

 

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